Fiscal policy is the policy via which any government can adjust its own internal spending levels and its tax rates in order to monitor and ultimately influence any national economy. It can be said as the sister strategy to the well-known monetary policy through which any central bank can influence the money supply of any nation.

Fiscal Policy

These policies can be used across various combinations so as to direct the economic goals of a particular country. Let’s have a look at how the fiscal policy actually works, as well as how it must ideally be monitored, and how the policy’s implementation might affect different sections of people in a nation’s economy.

Fiscal policy is more or less based on the varied theories of the renowned British economist named as John Maynard Keynes.

Popularly known as Keynesian economics, this theory basically states that governments can also influence their levels of macroeconomic productivity by eventually increasing or decreasing tax levels as well as public spending.

Fiscal Policy curbs inflation (which is generally considered healthy when it lies between 2-3%), ensures an increase in employment and makes sure that a healthy value of money is maintained. That being said, Fiscal policy plays a significantly important role in ultimately managing a particular country’s economy.

In the year 2012 many people worried that by virtue of the fiscal cliff which is a simultaneous increase in the tax rates and in the cuts in the spending of the government which is set to occur in the time January 2013, it would revert the U.S. economy back into recession.

The U.S. Congress avoided this fiscal cliff problem by ultimately passing the American Taxpayer Relief Act of 2012and making it effective as of Jan. 1, 2013.

Unfortunately, the effects of any sort of fiscal policy mandates are surely not the same for everyone.

Depending on the policymakers’ political orientations and total goals, any tax cut could probably ultimately affect only and only the middle-class segment, just because is typically the largest pie-covering economic group.

In the times of rising values of taxation and of economic decline, it is this very same middle-class group that might have to pay up more and more taxes as compared to the wealthier upper class.

Similarly, when any particular government decides to ultimately adjust its own spending, its fiscal and monetary policy may only affect a set group of people. This sums up what fiscal policy is all about.